How much should you charge for your products and services? Traditionally, businesses have answered this question based on the cost to produce or provide their goods and services. This course shows you the economic factors behind pricing based on cost and the pros and cons of a cost-based pricing approach. Led by Darden faculty and Boston Consulting Group global pricing experts, the course provides the practical and research-based models and methods you need to set prices that maximize your profits.
By the end of this course, you’ll be able to:
--Apply knowledge of basic economics to make better pricing decisions
--Recognize opportunities for price discrimination—selling the same product at different prices to different buyers—and recommend strategies to maximize sales and profits
--Calculate three types of price elasticities to determine the impact of price on demand
--Analyze and apply different pricing models
-Cost-plus pricing
-Marginal cost-plus pricing
-Peak-load pricing
-Index-based pricing
--Evaluate the impact of channel intermediaries and customer lifetime value on pricing

Reviews

MK

Excellent introduction to the mathematics behind cost and pricing strategies. This course gave me a lot of good information that I've already started putting into practice at work.

NP

Jun 12, 2019

Filled StarFilled StarFilled StarFilled StarFilled Star

Really helpful and well-designed course for those interested in understanding the basic Pricing concepts in practice and learn how to approach any pricing challenge

From the lesson

Channel and Direct-to-Consumer Pricing

Welcome to our final week together in this course! We'll finish by discussing key concepts related to channel pricing--or pricing through the supply chain. You'll learn about double-marginalization, time value of money, and customer lifetime value (CLV)--not only what they are, but how to use them to improve pricing decisions. Then we'll show you three different pricing techniques that you can use to improve direct-to-consumer pricing. You'll finish with a real-world case analysis of Retail Relay, an online grocery ordering and delivery service. You'll be able to recommend a viable approach to their pricing dilemma based on knowledge from this course. Enjoy!

Thomas Kohler

Ronald T. Wilcox

Transcript

Now you understand the very basics of the marginal cost pricing. I'd like to walk you through an example from the airline industry to illustrate some of the nuances and risks that come with marginal cost pricing. First, let's talk about what are the marginal costs for an incremental passenger. And I propose to separate two cost blocks. One, the costs that happen on the ground, for example, the airport service fees for the facilities, for the security screening, the baggage handling, and the transaction costs for making the reservation, checking the passenger in and boarding in. Second, higher cost on the plane and this primarily higher fuel because you have additional weight on the plane with the passenger and his luggage and probably some consumption of meals and drinks. So let's look at flight from New York to Paris. And you see on this graph here, on the x-axis, the number of seats from the plane, and the plane has 220 passengers capacity, and on the y-axis you see the dollar per seat. We also included the demand curve, which shows how much demand you have at a given price point. Now, the full cost for the three classes you have are shown now. You have the business class, the premium coach, and the regular coach. And you were also able to determine your marginal costs, which as we discussed earlier are probably pretty low compared to the full cost. The first question now is seats should you offer in each of your classes. And here you do some market research and find out that the fare for a business class ticket is usually around $4,000. You see a demand of around 40 seats. So you decide to create 40 business seats on your plane. Those customers create a profit above the their full cost line, which you see here in the dark green area. Moving on to the premium coach, and a premium coach ticket goes for roughly $2,200 and again, you can see with the demand curve how many seats you should optimally have. In our example it's 30 and you see the revenue and the profit from those customers. Lastly, for the regular coach the ticket goes for roughly $1400 and you see the profit that you can make off of those customers. The total profit for the three classes is in all these three green areas. And they are designed to really pay for the full cost. So pretty much you broke even and you make a good margin by now. However, you still have empty seats on the plane. And those empty seats actually can be matched with demand that has a willingness to pay that is above marginal cost. So what you're trying to do now is to basically fill up the plane and make additional profit of it. And the way you do this is you offer sort of a special rate and you offer tickets for $700. And therefore you create an incremental margin above your $445 of marginal cost. And this is now profit dollars that you would not have achieved otherwise, simply because of the demand curve. So let's discus this airline example of marginal cost pricing in more detail. The advantages and disadvantages are the exact same as for the cost-plus price at full cost, and that really is because it is full cost pricing. But marginal cost pricing comes at a risk. The risk is that over time it impacts the willingness to pay of your customers and starts shifting their buying behaviors. So you're regular coach customer might ask himself why don't I wait a little bit next time before I book? Maybe I get a better rate, the closer we get to departure. As an airline, obviously, that's not a good thing. So you have to think about how do you avoid the shifts in buying behaviors. And the way to go about it is by differentiating your offering. So for example, the marginal cost ticket, in order to justify its lower price, has an extra fee to check your luggage or requires you to stay a weekend in Paris, which might not be the worst thing. So a couple of closing questions for you. Does your business use marginal cost pricing right now and should they? Do you understand really what is in your marginal cost? Is the incremental profit worth the longer term price erosion risk? And how could you differentiate your offering at marginal cost to avoid the price erosion?

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